Diageo Net Profit Hit by China Slowdown

Smirnoff Maker's Revenue Falls 8.5%

LONDON—Americans are drinking cheaper vodka and Chinese consumers are giving up high-end Scotch whisky. Both trends are bad news for
Diageo
DEO -0.04%
PLC, the world's biggest liquor company by sales.

The maker of Johnnie Walker Scotch and Smirnoff vodka on Thursday posted a sharp fall in full-year profit. Diageo blamed a dramatic collapse of demand in China—where sales of high-price Johnnie Walker Black Label fell nearly 30%—and problems in other emerging markets for the decline.

"Emerging-market weakness—often currency-related but also including some specific issues, such as the antiextravagance measures in China—has led to weaker top-line growth," said Chief Executive Ivan Menezes.

Like other consumer-products companies, Diageo has suffered from the devaluation of currencies in developing markets over the past year, reducing the value of its sales when translated back into its home currency.

Diageo, which makes products such as Johnnie Walker whisky, reported a fall in full-year profit.
Bloomberg

In North America, Diageo's biggest and most profitable market, sales fell 7% in the year ended June 30, compared with an increase of 7% a year earlier. Diageo said the change was mainly due to translating sales back into pounds from dollars. Excluding the impact of foreign-exchange movements, North American sales grew 3%.

But there were pockets of real concern for Diageo in the U.S. Smirnoff, which accounts for around a quarter of Diageo's North American sales by volume, suffered as smaller competitors entered the market and consumers chose to buy cheaper brands.

"Vodka is an incredibly competitive category," said Deirdre Mahlan, Diageo's chief financial officer, on a call with reporters. "Over last two years, there have been 210 new entrants into vodka [in the U.S.]. The lower price points are taking share."

Overall, Diageo reported net profit of £2.25 billion ($3.81 billion), compared with £2.45 billion a year earlier, on revenue 8.5% lower at £13.98 billion. Sales in China fell 33%, but there was an improved performance in Western Europe.

Diageo is the latest major spirits company to take a hit on China, nearly two years after the Chinese government banned extravagant gift giving and scaled back state-funded banquets.

Diageo said Wednesday that Gilbert Ghostine, who was recently appointed the company's president in India and Greater China, would leave Diageo in September for a new role. A spokeswoman for Diageo declined to comment on Mr. Ghostine's reasons for leaving.